All Job Creation Is Local (Well, Almost)

Seeking the "single best explanation for middle-class decline" this week, this week I wrote that in the age of globalization, localization was the most important factor in job creation. It was in local industries sheltered from international competition or rapid technological change where we saw the vast majority of job growth in the two decades before the Great Recession. And, as these sectors tended to be barely profitable and unskilled, middle-class incomes fell behind.

In Enrico Moretti's new book, "The New Geography of Jobs," he makes a related point: That "innovation sector" jobs, made profitable by their national or global audience, play an important role in creating service sector jobs that are explicitly local and cannot serve a national or global community. Via Mark Muro:

With only a fraction of the jobs, the
innovation sector generates a disproportionate number of additional
local jobs and therefore profoundly shapes the local economy. A healthy
traded sector benefits the local economy directly, as it generates
well-paid jobs, and indirectly as it creates additional jobs in the
non-traded sector. What is truly remarkable is that this indirect effect
[on] the local economy is much larger than the direct effect. My research,
based on an analysis of 11 million American workers in 320 metropolitan
areas, shows that for each new high-tech job in a metropolitan area,
five additional local jobs are created outside of high tech in the long
run.

This makes for a compelling image: The "innovation sector" jobs performing the role of a star, drawing in a small solar system of employment that revolves around them. Let's say new tech team makes something that millions of people around the world or country want to use, and they get money for it. For every new tech software team in the Valley, Moretti writes, Mountain View requires another doctor, another dry cleaner, and another store clerk, and so forth, to perform their day-in-day-out needs. Global (or national) demand creates high-paying jobs that raises local demand for service jobs that are a mix of high-paying (doctors) and low-paying (receptionists).

Now scrap the space metaphor, and just think about geography. What Moretti is really saying is that jobs are created because people with money have local needs and their local needs create local jobs. This suggests that one of the top challenges of job creation is locality: It's letting lower-skilled Americans live nearer to higher-skilled Americans with lots of money. So how to build enough residential units near to extremely productive cities should be just as important to research centers like the Metropolitan Policy Program as a big-thinking innovation agenda that starts in Washington.

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Derek Thompson is a staff writer at The Atlantic, where he writes about economics, labor markets, and the media. He is the author of Hit Makers.